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Delaware court arbitration proceedings declared unconstitutional

The United States District Court for the District of Delaware recently struck down the Delaware Court of Chancery’s one-of-a-kind arbitration program, holding that it violated the First Amendment’s right of access to the courts. The program allowed sitting Court of Chancery judges to act as arbitrators and to host private arbitration sessions within their courtrooms. In a case brought by the Delaware Coalition for Open Government, U.S. District Court Judge Mary A. McLaughlin found that the proceeding functions essentially as a non-jury trial before a Court of Chancery judge and must be opened to public access.1 The decision strikes down only Delaware’s unique court-based arbitration program. Private arbitrations and Delaware mediation programs are not affected.

The Delaware General Assembly amended the Court of Chancery Rules in April 2009 to create the arbitration program. Pursuant to the legislation, the Court of Chancery may “arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under the rules of the Court, to arbitrate a dispute.”2 Court of Chancery Rules were adopted in January 2010 to implement the change. To qualify for the program, both parties must have consented to the arbitration and the parties must have met the eligibility criteria for Court of Chancery mediation, including: at least one party had to be a “business entity,”3 and at least one party had to be formed or organized under the laws of Delaware or have its principal place of business in Delaware, and in the case of claims solely for monetary damages, the amount in controversy had to be no less than $1 million dollars.4 Parties did not have to have a prior arbitration agreement in place, but both parties must have consented to arbitration by the Court of Chancery.

The court-based arbitration program was to provide many of the traditional benefits of arbitration: cost-effective dispute resolution, prompt issuance of an award, and, importantly, confidentiality of the proceedings. Proceedings were to be conducted outside the view of the public and press, and awards (while themselves kept confidential) were made immediately enforceable by a public court judgment. The stated purpose of the Court of Chancery arbitration program was to “preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes, particularly those involving commercial, corporate, and technology matters.”5 Despite the purported benefits, the program reportedly was used only six times since its inception, and only one public decision was reported.

In Delaware Coalition for Open Government v. Hon. Leo E. Strine, JR, et al., Delaware’s desire to provide cost-effective commercial dispute resolution collided with the Constitutional principle of public access to court proceedings. In 1980, the U.S. Supreme Court ruled in Richmond Newspapers, Inc. v. Virginia that the First Amendment protects the public’s access to criminal judicial proceedings.6 Although the U.S. Supreme Court has not explicitly extended this principle to civil court proceedings, every U.S. Circuit Court of Appeals has done so, including the Third Circuit in the case Publicker Industries, Inc. v. Cohen.7

Plaintiff, a non-profit public interest group, argued that under the First Amendment to the U.S. Constitution the public has a presumptive right to access judicial proceedings.8 Plaintiff contended that an arbitration before a sitting Court of Chancery judge amounted to a trial “behind closed doors,” which granted the public no access.9 Plaintiff stated:

Although procedure may vary slightly, the parties still examine witnesses before and present evidence to the Arbitrator (a sitting judge), who makes findings of fact, interprets the applicable law and applies the law to the facts, and then awards relief which may be enforced as any other court judgment.10

Defendants, the court, individual justices, and the State of Delaware, argued that arbitration proceedings are not subject to public access, that arbitration proceedings have historically not been open to the press and general public, and that privacy is an essential benefit to arbitration.11 Specifically, defendants cite the Alternative Dispute Resolution Act of 1998 to argue that federal court-sponsored alternative dispute resolution programs may be conducted in private, even where the arbitrator is a Federal Magistrate Judge.12 Further, defendants relied on a two-prong “experience” and “logic” test derived from N. Jersey Media Group v. Ashcroft, 308 F.3d 198, 209 (3d Cir. 2002). Defendants asked the court to consider whether the place and process of the proceedings have historically been open to the press and general public (the experience test) and whether public access plays a significant positive role in the functioning of the particular process in question (the logic test).

Judge McLaughlin side-stepped the “experience” and “logic” tests and found for the plaintiffs. The court held that, as a threshold issue, the Court of Chancery arbitration program was not the type of program that is subject to the “experience” and “logic” tests, because the arbitration program, in practice, was the equivalent of a civil trial.13

Judge McLaughlin compared the characteristics of the court-based arbitration program proceeding with that of civil trials and applied similar attention to the roles of arbitrators versus judges and the resources and procedures used in the Court of Chancery arbitration program.14 Unlike traditional arbitration proceedings, she asserted, in which parties hire an independent arbitrator, the Court of Chancery’s arbitration program permits sitting judges, paid by the state, and assisted by Court of Chancery staff and resources to arbitrate the dispute. The court held:

In a usual arbitration proceeding, if one party refuses to comply, the other can enforce compliance only by pursuing enforcement through a court. In Delaware, the judge and arbitrator are the same, so the judge’s final award results in a judgment enforced by state power. The judge can also issue interim, interlocutory, or partial orders and awards . . .. These orders, and the final arbitration award and judgment, bind the parties much as any court orders would. They are nearly identical to a judge’s orders in a civil trial, but with one important difference . . . [T]he judge [sitting as arbitrator] does not publish his rulings or reasoning. The public does not know the factual findings the judge has made or what legal rules the judge is, or should be, applying to these arbitrations.15

Neither did the court credit the Alternative Dispute Resolution Act argument, stating that the court found no evidence of federal magistrates serving as arbitrators in practice.16 From a public policy perspective, Judge McLaughlin also concluded that the benefits of public access are not outweighed by the speculative concern that commercial parties will take their dispute to purely private venues for arbitral adjudication.17

Delaware Coalition for Open Government v. Hon. Leo E. Strine, JR, et al. raises important questions about the limits of arbitration programs in which the personnel, procedure, and resources are closely related to a court. Counsel of record for the defendants, Lawrence A. Hamermesh, a professor at Widener University School of Law, informs us that Delaware’s novel arbitration program has been suspended pending appeal. For now, clients seeking dispute resolution by means of arbitration should consider including well-articulated arbitration clauses providing for traditional arbitration mechanisms.

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